Now We Go Forward

I saw Ali Velshi, CNN Senior Business Correspondent, interviewed recently regarding our current financial crises. Velshi says we got here by making three basic faulty assumptions about the future.

1. If you own a home, it will go up in value;
2. Your wages will go up; and
3. Your investments in the stock market will go up

Believing in these tenets, we all felt free to live beyond our means. After all, if things are always going to get better, we will always have an opportunity to catch up. We all believed it, all of us, individuals, businesses and the government.

He also illustrated how the mortgage industry works. You borrow money from the bank. Your bank sells your mortgage to Wall Street, who, in turn sells packages of mortgages to big investment groups. Everyone along the chain gets a percentage of the interest you are paying. No one along the chain is too concerned about the debt because they have sold it off to someone else. Then interest rates go up and you, the homeowner, can’t pay your mortgage. Your house is foreclosed upon. In an effort to get the money flowing again, the bank tries to sell your house but it is no longer worth anywhere near the amount of money they loaned out on it. Now no one can recoup their losses. Multiply this situation by the millions of homes in foreclosure and it suddenly becomes clear what the “mortgage crises” is all about.

He believes the bailout was necessary. Our whole country is based on credit. Everyone is borrowing money – you, the stores at which you shop, the suppliers at which they shop, etc., etc. Things being what they are, the banks don’t trust anyone and so are reducing everyone’s credit. It’s not just your credit limits being reduced. It’s also the grocery store’s credit, so they can no longer afford to purchase what they need to fill their shelves. It’s the supplier’s credit so they can no longer provide the supplies to your grocery store.

159,000 jobs were lost in September bringing the total for 2008 to 750,000 lost jobs. These are all people who are no longer able to spend money. Velshi feels the bailout was necessary because we all need money to float through the system so credit will loosen up. He feels that without the bailout the recession would drag out longer.

Suze Orman believes that banks are more at fault for lending us more then we can afford than we are for borrowing it. While it is certainly easier to blame the big bad bank for our problems, I don’t believe it’s helpful to play the victim. If someone had a change of circumstances after having purchased their home, which greatly reduced their income, that’s one thing but if someone bought a house with an unmanageable mortgage, they need to acknowledge their responsibility for losing that house. Suze recommends that we not panic and withdraw our money from the bank or sell off our 401(k) holdings or pull all of our money out of the stock market. She suggests the following:

1. Make sure your money is safe – FDIC or NCUA (for credit unions) insured, T-Bills, Bonds or Treasury Notes are also safe;
2. Pay down your credit cards;
3. Get or keep your health and term life insurance – many people’s finances are ruined by major health issues, don’t stop paying your health insurance premiums;
4. Don’t stop investing in your retirement plan; and
5. Stop spending what you can’t afford to spend. Stop living beyond your means!

The bailout did pass so we will now need to deal with it. At the end of the day, this big shakeup should force all of us to take a good hard look at our financial lives. The basic advice is not going to change no matter how hard you look. Live below your means, save your money, pay off your debt.

Value yourself by who you are, not by what you have!